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How to Avoid Financial Catastrophe and Find the Franchise of Your Dreams

How to Avoid Financial Catastrophe and Find the Franchise of Your Dreams

Before taking the financial and emotional plunge into franchise ownership, it is vital that you do your due diligence to ensure your future happiness - and avoid financial catastrophe. You will want to make sure that not only is the franchise you’re investing in financially sound, but that it’s also a good fit for your personality and interests, and that the franchise culture is one that you believe in.

Quantitative Due Diligence

The first thing that most prospective franchisees want to know about is the money side of things. How much is the initial investment? Also note the franchisor’s ongoing advertising fees and royalties. Those are the easy figures to determine, as they are found in the Franchise Disclosure Document (FDD) - which you’ll receive early on in your conversations with the franchisor (if you don’t, it’s a red flag!). Later in the process you will want to hire a franchise attorney to dig deeper, and protect you from any hidden minefields that may be buried in the fine print.

[Related: Five Things to Avoid When Investing in a Franchise]

The harder questions are: How much can I expect to see in profits as my business grows? At what point will you break even? What are the bottom line net margins (EBITDA)? Those questions are unfortunately NOT disclosed fully in the FDD, because the federal trade commission does not REQUIRE this in the document. There will hopefully be some partial disclosures, but not full disclosure. This is partly because in every system there are differences in the way individual owners run their books. And given that full financial disclosures of ALL franchisees in a given system is not industry standard (and frankly not practical to gather data for) the obvious legal recommendation is not to do so.

So how do you adequately discover this information? By a process called validation, which is simply calling numerous franchises in the system and asking them! They are allowed to tell you anything, and most of them are happy to do so. The contact information for all current franchisee’s is required to be disclosed in the FDD - as well as those that have left the system in the last three years! So it’s easy but time-consuming, and the most important step that should never be skipped.

Here are a few starter questions:

  • What is your annual gross revenue?
  • How did your initial investment compare to the franchisor’s estimates?
  • What’s your favorite part of the business?
  • What are some struggles you’ve faced or that you currently face in the business?
  • Do you see returns for your contributions to the franchisor’s advertising plan?
  • Do you feel like you made a good investment? Would you advise me or other friends and family to invest as well?

There are many similar questions you can (and should) ask. You and your franchise consultant can work out a list that's appropriate for the business you're looking at. Interview as many franchisees - and former franchisees - as you need to feel comfortable. Remember, if it doesn’t feel right, this may not be the franchise for you!

Qualitative Due Diligence

Equally as important as profitability and functionality is the culture of the franchise. Digging into the culture of a potential franchise will help give you an idea if you could be happy running it. When all is said and done, you want to make a sound investment and run your own business on your own time - but you need to be happy doing it!

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For help finding the franchise that’s right for your personality and lifestyle, take our franchise match-up quiz; it can help you get started on your own franchise journey. 

Read our latest success story of “Women Winning with Franchising” here.

Jane Stein is the founder of Your Franchise is Waiting, a consultancy firm for men and women exploring franchising as an alternative career path.


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